Q3 2025 Xponential Fitness Inc Earnings Call
Speaker #3: Greetings and welcome to the Third quarter 2020 Earnings Call . At this time , all participants are in a listen only mode . A question and answer session will follow the formal presentation .
Speaker #3: If anyone should require operator assistance , please press Star Zero on your telephone keypad . As a reminder , this conference is being recorded .
Speaker #3: It is now my pleasure to introduce your host , Patricia Nir . Thank you . You may begin .
Speaker #4: Thank you . Operator . Good afternoon and thank you all for joining our conference call to discuss Xponential Fitness, Inc. third quarter
Speaker #4: 2020 financial results . Xponential Fitness, Inc. . I am joined by Mike , Chief Executive Officer and John Malone , chief Financial officer .
Speaker #4: A recording of this call will be posted on the investor section of our website at investor . We remind you that during this conference call , we will make certain forward looking statements , including discussions of our business outlook and financial projections .
Speaker #4: These forward looking statements are based on management's current expectations and involve risks and uncertainties that could cause our actual results to differ materially from such expectations .
Speaker #4: For more detailed description of these risks and uncertainties , please refer to our annual Report on Form 10-K for the year ended December 31st , 2020 .
Speaker #4: For filed with the SEC and subsequent filings with the SEC . We assume no obligation to update the information provided on today's call .
Speaker #4: In addition , we will be discussing certain non-GAAP financial measures in this conference call . We use non-GAAP measures because we believe they provide useful information about their operating performance .
Speaker #4: That should be considered by investors in conjunction with the GAAP measures that we provide . A reconciliation of these non-GAAP measures to comparable GAAP measures is included in the earnings release that was issued earlier today .
Speaker #4: Prior to this call , and in the investor presentation available on our website . Please note that all numbers reported in today's prepared remarks refer to global figures unless otherwise noted .
Speaker #4: As a reminder , in order to ensure period over period comparability and consistent with our reporting methods , since IPO , we present all KPIs on a pro forma basis , meaning , for the full KPI history presented , we only include brands that are under our ownership .
Speaker #4: As of the current reporting period . For the period ended September 30th , 2025 . This includes Bftt , Club Pilates , Pure Barre , Stretch Lab , and Yoga six .
Speaker #4: I will now turn the call over to Michael Nuzzo , CEO of Xponential Fitness, Inc. .
Speaker #5: Thanks , Patricia and good afternoon everyone . First , I'd like to thank the entire Exponential Family for welcoming me on board . As I said , when I started , exponential is uniquely positioned to thrive as a successful consumer business .
Speaker #5: Having completed my first 90 days, I've had the opportunity to deep dive into our business, connect with many of you, and gain a clear understanding of both our strengths and the areas where we can improve.
Speaker #5: This period has reinforced my belief in the power of our brands and the dedication of our franchisees . I want to again highlight three foundational elements .
Speaker #5: First , exponential is in a great space . Boutique fitness has substantial momentum and long term growth potential as consumers continue to invest more in their health and wellness routines .
Speaker #5: Second , exponential has strong studio brands , which are loved by members and led by passionate and committed franchisees . And third Exponential has made progress in building a team and a supporting foundation to start driving stronger growth and financial returns .
Speaker #5: Importantly , given the three recent divestitures we have a more optimized brand portfolio . With this , I am convinced we can provide better franchisee support with a more appropriate level of infrastructure consistent with our smaller brand portfolio , and I'll discuss recent actions we have been taking to address this .
Speaker #5: Let me walk through these elements in more detail . First , the industry it is estimated that a record 247 million Americans engage in an exercise routine in 2024 , up by over 25 million from just 2019 .
Speaker #5: And representing the 11th consecutive year of growth within the space . The global boutique fitness market is expected to reach 60 billion by 2030 , fueled by a growing demand among all age groups for specialized community focused experiences .
Speaker #5: The sectors emphasis on holistic health and strong engagement will likely continue to fuel growth . That outpaces the overall fitness industry . These trends bode well for exponential .
Speaker #5: Secondly , we have strong brands and an excellent network of franchisees . I have spent time with many of our franchisees over these past few months , and their commitment to driving their local businesses , ultimately fueling our success is clear .
Speaker #5: Each of our brands has unique attributes that contribute to their performance . Club Pilates with over 1200 locations across North America and over 150 locations internationally , is our flagship brand and the scaled leader in the category .
Speaker #5: Club Pilates Studios generate the strongest new unit economics I have ever seen for example , our recent two vintages of Club Pilates openings , the 2023 and 2024 cohorts , have shown record year one revenue stamps exceeding the previous three vintages at month 12 by an average of 27% .
Speaker #5: This demonstrates the brand's continued popularity and significant growth opportunity ahead . Yoga six and Pure Barre are complementary studio concepts that have a healthy owner , operator , franchisee structure and continue to generate impressive , sustained , organic growth .
Speaker #5: They both also exhibit strong retention , driven by an almost obsessive member base , which we love . Of course . Stretch lab and BFT have all the attributes to return to and exceed their historical levels of performance .
Speaker #5: BFT born in Australia , has a compelling offering in the high intensity interval training space . Currently , we have a cross-functional team focused on refining our go to market approach in the US to drive better individual studio economics .
Speaker #5: Member awareness and market density . Stretch labs assisted stretch Model is a great complementary addition to a weekly workout routine . I've experienced the benefit firsthand after exhibiting solid AUVs a few years ago .
Speaker #5: Recent Stretch lab revenue trends have been pressured as Medicare Advantage plans a strong source of member flow , have scaled back on stretch as a covered benefit .
Speaker #5: But based on what I've learned , there are meaningful opportunities to improve every element that impacts member acquisition and retention . I expect us to make steady progress across both brands as we position for 2026 .
Speaker #5: Importantly , following the recent divestitures of Cyclebar Rumble and Lindora , we now have a more streamlined brand portfolio . Which brings me to my third key area of focus and probably the most significant opportunity for the company .
Speaker #5: While exponential has a foundation in place to support franchisees and members , there is substantial opportunity to improve without adding additional cost . The five major areas of focus are marketing , operations , support , unit growth and licensing , innovation and efficiencies , and cost savings .
Speaker #5: I have been dedicating significant time to strengthening each of these core functions within a more streamlined portfolio . This is not about adding additional cost , rather , it's reallocating and refining how we operate to drive greater focus and efficiency Let me walk you through each aspect of our tactical approach .
Speaker #5: First , in the area of marketing , our new leadership team in marketing is enhancing our corporate capabilities in digital media , CRM , search and social to augment franchisee local marketing efforts .
Speaker #5: We have launched a pricing study focused first on Club Pilates , which will serve as a framework for our other concepts . All our corporate brand websites are being refreshed to improve our member journey from initial contact to conversion , and retention .
Speaker #5: We are also addressing lead management system and process deficiencies to help strengthen our top of funnel KPIs across our portfolio . In the fourth quarter , we are making additional .
Speaker #5: marketing fund investments to launch a national brand campaign for Club Pilates , expanding our reach through new performance channels like podcasts , YouTube TV and CTV .
Speaker #5: Overall , we are improving our corporate marketing engine with a clear focus to drive organic growth . These improvements are designed to help support our brands , optimize performance and strengthen our connection with both prospective and existing members .
Speaker #5: Second , operations support . We launched our initial field Support teams with a laser focused mission to provide best practices to studios and franchisees on all the ways to enhance local studio , financial performance .
Speaker #5: We are working closely with franchisees to gather feedback , improve processes , refine our approach and ensure these teams are effectively supporting our studios .
Speaker #5: On the retail front , the transition to the outsourced model is well underway . We expect the implementation to be largely complete by year end , and we are looking forward to delivering a much more efficient retail experience for both our corporate teams and franchisees in the area of unit growth and licensing .
Speaker #5: We've made swift progress in ramping up our improved real estate and licensed sales support capabilities . We are working closely with a leading outsourced partner in franchise real estate to implement best in class site selection practices , including leveraging the latest AI powered market assessment tools .
Speaker #5: These improvements are designed to ensure we're making smart , data driven decisions that support long term success . In addition , we are taking steps to attract more established operators along with private equity into the existing franchisee base , particularly for Club Pilates .
Speaker #5: I'm also excited to share that during Q3 , we successfully completed the franchise disclosure documents , registration process across brands and states in international markets .
Speaker #5: We continue to add locations focused on Club Pilates and BFT, and I look forward to working with the team on ways to accelerate our growth within key strategic geographies.
Speaker #5: In both Europe and Asia . On the innovation front , we are focused on generating new class content and member engagement within our current portfolio and see substantial upside within each of the brands .
Speaker #5: For example , in Club Pilates , we recently launched our first new class in several years , Circuit , which incorporates more intense athletic movements .
Speaker #5: While still being accessible to even beginners . In yoga six . We are refining our class offering menu for 2026 . Both circuit and new planned classes in yoga six will have appeal across age groups and feature strong social media attributes .
Speaker #5: This month , we also defined a new club , Pilates studio design , a big request from our franchisees at a corporate level .
Speaker #5: We are making sure that our innovation and marketing teams are closely aligned such that new content continuously fuels the marketing engine , driving engagement and retention .
Speaker #5: I believe we are just scratching the surface with our abilities to bring innovative leadership to the space . Finally , efficiencies and cost savings .
Speaker #5: One of my key learnings these past 90 days was that we needed to move quickly to rightsize our corporate organization , both as a result of the divestitures and in an effort to more broadly streamline the organization .
Speaker #5: As a result , in October , we executed a reduction in force across most of our corporate departments , which was a difficult but necessary task .
Speaker #5: This is expected to result in annualized SG&A savings of about 6 million . We will continue to identify ways to optimize our operations while upholding our commitment to providing the best service to our franchisees and members .
Speaker #5: I want to be clear that the initiatives here are clearly multifaceted . And while we are acting with the requisite immediacy , the full impacts will unfold over the ensuing quarters .
Speaker #5: We intend to measure progress and adjust as needed , ensuring that the changes we implement are both effective and sustainable . With that , I'll turn the call over to John .
Speaker #5: John .
Speaker #6: Thank you . Mike . Good afternoon everyone . We ended the quarter with 3066 Global Open Studios . This quarter . We opened 78 gross new studios , 57 in North America and 21 internationally .
Speaker #6: There were 32 global studio closures in the third quarter , or about 1% representing an annualized closure rate of 4% in the third quarter , the company sold 49 licenses , of which 16 were in North America and 33 were international .
Speaker #6: Our base of licenses sold in contractually obligated to open is over 1000 studios in North America , and we also have over 700 International Master franchise obligations .
Speaker #6: Approximately 40% of our global licenses are over 12 months behind their applicable development schedules . Third quarter North America . System wide sales were 432.2 million , up 10% year over year .
Speaker #6: This was driven primarily by growth from net new studio openings , notably , about 90% of system wide sales growth came from a higher mix of actively paying members , with the remainder driven by higher pricing and mix shifts .
Speaker #6: Same store sales were down 0.8% for the quarter and up 5.4% on a two year stacked basis . Same store sales trends in Q3 were driven by a confluence of factors , and we are in the process of examining them in detail at a high level .
Speaker #6: We've identified lead flow and member conversion issues across the portfolio that we are working to address . Some of which were likely accentuated by our implementation of additional member privacy safeguards earlier this year .
Speaker #6: At a more granular level , Stretch Lab continues to be impacted in part by brand positioning challenges and the Medicare Advantage coverage reductions .
Speaker #6: Meanwhile , at Club Pilates , as you all know , we are benefiting from a stronger sales ramp in newer cohorts . While this is great for studio economics , it means that recent cohorts are already near capacity when they enter the same store .
Speaker #6: Sales calculation translating to lower same store sales contributions . As Mike alluded to . We are reviewing all elements of corporate and city level operations to compete better and more profitably .
Speaker #6: Our North America run rate , average unit volumes climbed to 668,000 in the third quarter , up 2% from 654,000 in the prior year period .
Speaker #6: The increase in AUVs was largely driven by a higher number of actively paying members and higher pricing for new members . Given the consistent level of demand for our brands and Club Pilates in particular .
Speaker #6: We believe there is a incremental opportunity to increase revenues through enhanced pricing methodologies , including new price tiers , disciplined cancellation policies and new package offerings on a consolidated basis , revenue for the quarter was 78.8 million , down 2% , or 1.7 million , from 80.5 million in the prior year period .
Speaker #6: 73% of revenue for the quarter was recurring , which we define as including all revenue streams except for franchise territory revenues and equipment revenues .
Speaker #6: Given these materially occur upfront before the studio opens , franchise revenue for the quarter rose 17% year over year , or 7.4 million , to 51.9 million , driven primarily by the catching up of franchise territory license terminations and by royalty revenues .
Speaker #6: Given a higher effective royalty rate driven by new studio openings, the company will continue to terminate licenses at elevated levels in the fourth quarter, noting that terminations can take time given requirements around notification timelines.
Speaker #6: Equipment revenue was 7.5 million , down 49% year over year , or 7.2 million , reflecting a 41% decline in global installation volume compared to the prior year period .
Speaker #6: Merchandise revenue of 4.8 million was down 27% year over year , or 1.8 million , reflecting lower sales volumes . As a reminder , in Q4 , we will begin the implementation of our outsourced retail strategy with Witco , which is expected to contribute improved margin expansion in 2026 and further optimize non-core operations and reduced working capital commitments .
Speaker #6: Franchise marketing fund revenue was 8.8 million , an increase of 3% year over year , or 0.3 million , primarily due to continued growth in system wide sales in North America and increased average unit volumes from our installed base of studios .
Speaker #6: Lastly , other service revenue , which includes sales generated from rebates from processing studio system wide sales , brand access partnerships , company owned studios X and X , amongst other items , was 5.9 million , down 6% , or 0.4 million .
Speaker #6: The decrease was primarily due to lower brand access fees . Turning to our operating expenses for the quarter . Cost of product revenue were 10.2 million , down 41% , or 7 million year over year .
Speaker #6: The decrease was primarily driven by the lower volume of equipment , installations and merchandise sales during the period . Cost of franchise and service revenue were 7 million , up 45% , or 2.2 million year over year .
Speaker #6: The increase was largely driven by the increased recognition of Associated Commission expenses from the catching up of franchise territory , license terminations . Selling , general and administrative expenses were 24.7 million , down 47% , or 21.5 million year over year .
Speaker #6: The decrease in CA was primarily lower due to a decrease in legal expenses driven by non-recurring insurance reimbursement and lower restructuring charges from lease liability settlements .
Speaker #6: During the quarter , we received 10 million in cash reimbursement from our professional insurance policies related to the SEC investigation that was concluded without action in July , as well as other defense costs from other active inquiries .
Speaker #6: There was an additional 10 million insurance receivable recorded for SEC investigation and franchise matters . As of the end of the quarter . Noting that the receipt of these recovery payments in future periods will have no impact to GAAP earnings or EBITDA at present .
Speaker #6: Through the third quarter , we have entered into and paid lease settlement agreements of approximately 32.7 million as of September 30th , 2025 .
Speaker #6: We have approximately $8.8 million of lease liabilities yet to be settled. We expect most of the remaining liabilities will be settled during the remainder of 2025.
Speaker #6: The preseason and amortization expenses were 3.7 million , down 13% , or 0.5 million compared to the prior year period . Marketing fund expenses were 9 million , up 40% , or 2.6 million year over year , afforded by higher system wide sales and associated marketing fund revenue contributions .
Speaker #6: Acquisition and transaction expenses were 3.1 million , down 16% , or 0.6 million , from the prior year period . This includes the Contingent Consideration Activity , which is related to the Rumble acquisition Earnout and is driven by the share price at quarter end .
Speaker #6: We mark to market the Earnout each quarter and adjust our accruals accordingly . Note that this Earnout will persist despite the recent divestiture of the brand .
Speaker #6: We recorded net loss of 6.7 million in the third quarter , or loss of $0.18 per basic share , compared to a net loss of 18.1 million , or net loss of $0.29 per basic share in the prior year period .
Speaker #6: We continue to believe that adjusted net income is a more useful way to measure the performance of our business . A reconciliation of net income and loss to adjusted net income and loss is provided in our earnings press release .
Speaker #6: Adjusted net income for the third quarter was 19.3 million , or adjusted net income of $0.36 per basic share on a share count of 35.1 million .
Speaker #6: Shares of class A common stock . Adjusted EBITDA was 33.5 million . In the third quarter , up 9% , 2.7 million , compared to 30.8 million in the prior year period , primarily driven by increased margin from licensed terminations and increased royalties in our franchise revenues .
Speaker #6: Adjusted EBITDA margin was 42% in the quarter , up from 38% in the prior year period . Turning to the balance sheet , as of September 30th , 2025 , cash , cash equivalents and restricted cash were 41.5 million , up from 32.7 million as of December 31st , 2024 .
Speaker #6: For the nine months ended September 30, 2020, net cash provided by operating activities was $17.6 million, which includes $2.8 million in lease settlements.
Speaker #6: Net cash used in investing activities was $2.3 million, with $4.3 million used to purchase property and equipment and intangible assets, offset by $2 million in proceeds from the disposition of brands.
Speaker #6: Net cash used in financing activities was 6.6 million , which primarily includes 5.9 million in net borrowings on long term debt , 5.7 million in payments on preferred stock dividends , 3.4 million payments on promissory note liability , and 2.3 million in payments for taxes related to net share settlement of restricted stock units .
Speaker #6: Total long term debt was 376.4 million as of September 30th , 2025 , compared to 352.4 million as of December 31st , 2024 .
Speaker #6: The net increase in total long term debt is largely due to the company drawing additional debt in the first quarter of 2025 for general working capital purposes and associated fees , offset by quarterly principal payments .
Speaker #6: As previously communicated , the company is actively exploring multiple work streams to refinance our term loan in advance of its coming current . In May of 2026 .
Speaker #6: Let's now turn to our outlook for 2025 . We are reiterating guidance for . Net new studio openings , revenue and adjusted EBITDA .
Speaker #6: We are taking a more conservative approach to North American system wide sales given current business conditions and to account for the divestiture of Lindora .
Speaker #6: Note that guidance and year over year comparisons for system wide sales and net new studio openings exclude Cyclebar , Lindora and Rumble in both periods for comparability .
Speaker #6: We now project North America system wide sales to range from 1.73 billion to 1.75 billion , representing a 12% increase at the midpoint .
Speaker #6: We continue to expect 2025 global net new studio openings , which is net of closures to be in the range of 170 to 190 , representing a 37% decrease at the midpoint from the prior year .
Speaker #6: We expect the number of closures to be approximately 5% of the global system this year . As a percentage of total open studios .
Speaker #6: Total 2025 revenue is expected to be between 300 million and 310 million , unchanged from previous guidance and representing a 5% year over year decrease at the midpoint of our guided range .
Speaker #6: Adjusted EBITDA is expected to range from 106 million to 111 million , unchanged from the previous guidance and representing a 7% year over year decrease at the midpoint of our guided range .
Speaker #6: This range translates into a 35.6% adjusted EBITDA margin at the midpoint . We continue to expect total SG&A to range from 130 to $140 million , when further excluding the one time lease restructuring charges .
Speaker #6: Brand divestitures and regulatory legal defense expenses . We are expecting a of 110 to 115 million and a range of 95 to 100 million , when further excluding stock based costs .
Speaker #6: As a reminder , in the fourth quarter , the company hosts its annual franchise conference , which has a net 3.7 million expense in the period .
Speaker #6: Regarding marketing fund in the fourth quarter , we expect to see marketing fund spend exceed marketing fund revenue by approximately 5 million , largely driven by the nationwide branding campaign for club Pilates .
Speaker #6: In terms of capital expenditure , we now anticipate approximately 6 million to 8 million for the year or approximately 2% of revenue at the midpoint .
Speaker #6: This compares to previous guidance of 10 million to 12 million , or approximately 4% of revenue at the midpoint . For the full year , we continue to expect our tax rate to be mid to high single digits .
Speaker #6: Share count for purposes of earnings per share calculation to be 34.8 million and 1.9 million . In quarterly cash dividends related to our convertible preferred stock .
Speaker #6: A full explanation of our share count calculation and associated pro forma EPs and adjusted EPs calculations can be found in the tables at the end of our earnings press release , as well as our corporate structure and capitalization .
Speaker #6: FAQ on our investor website . We continue to anticipate our Unlevered free cash flow conversion to be approximately 90% of adjusted EBITDA , as we require minimal capital expenditure to grow the business .
Speaker #6: We continue to expect that our anticipated interest expense in 2025 will be approximately 49 million . Tax expenses to now be approximately 5 million , including the cash usage for tax receivable agreement and tax distributions to pre-IPO LLC members and approximately 8 million in cash dividend related to our convertible preferred stock , resulting in levered adjusted EBITDA , cash flow conversion of approximately 35% .
Speaker #6: This concludes today's prepared remarks . Thank you all for your time today . We will now open the call for questions . Operator .
Speaker #3: Thank you . We will now be conducting a question and answer session . If you would like to ask a question , please press star one on your telephone keypad .
Speaker #3: A confirmation tone will indicate your line is in the question queue . You may press star two to remove yourself from the queue .
Speaker #3: For participants using speaker equipment and may be necessary to pick up the handset before pressing the start keys . One moment please , while we pull for questions .
Speaker #3: Our first question comes from the line of Chris Okell with Stifel . Please proceed with your question .
Speaker #7: Thanks . Good afternoon guys . John , I know Club Pilates comps had moderated last quarter , I think , to the mid-single digit range .
Speaker #7: Can you provide an update on how that played out in the third quarter ? And then maybe current trends you're seeing in club Pilates , specifically ?
Speaker #6: Thanks , Chris . Yeah . So in Q2 of 2025 , you know , it moderated closer to the mid-single digit , which we said was around 5% in Q3 .
Speaker #6: We did see it come into the low single digit , or about 1% in the third quarter . And as we explained on the call , what we're really seeing is your install base of studios .
Speaker #6: Now , getting to what we believe is a full maturity . You know , given the current operating structure and number of members and pricing that they have , which is around about $1 million AUV .
Speaker #6: So as we add new units , you know what we're seeing is these new units are coming on pretty efficiently and getting up to that kind of , let's call it 900 to $1 million AUV very early in the first 12 months of operation , which means as they move into the 13 plus month , they're not really comping like they used to , because now the whole system is almost at that million dollar AUV .
Speaker #6: So that's one of the phenomenons that we're talking about is just the efficiencies of the ramp and club Pilates . And because they're at full capacity , they're not really comping beyond the million dollars .
Speaker #5: Yeah . Chris . And I'll add a couple points as well . Yeah , it's a great brand . Obviously strong AUVs and a great ramp .
Speaker #5: High productivity . We should still expect to grow organically and obviously we're happy with where we were in the first half of the year .
Speaker #5: I would say that in an increasingly competitive space , we have to do better at helping our franchisees compete better . And in the script , we talked about a lot of the areas that we're we're focused on .
Speaker #5: John and I also called out some of the deficiencies in our lead generation , and member conversion capabilities , and we're focused on addressing those .
Speaker #5: And beyond that , we've got to up our game in marketing and studio ops support . So I think the team is galvanized around that .
Speaker #5: And we're excited to support what is a really great brand .
Speaker #7: Yeah , that makes sense , it leads to my follow up question , though , is , you know , given that Club Pilates is at record high utilization , I guess , and that you're looking into this enhanced , I think you called it enhanced pricing strategies to drive revenue .
Speaker #7: I guess my question is two parts . First , how do you balance the push for higher prices with the risk of alienating members in a more unpredictable , let's say , macro environment ?
Speaker #7: And then secondly , instead of focusing on pricing , how much opportunity is there to drive growth to fill the significant off peak capacity hours that exist ?
Speaker #7: I guess outside of the morning and evening rush?
Speaker #5: Yeah , I think you're hitting on a couple really important topics , and I think the quick answer is the best way to do it is to bring in an expert who has done pricing analysis and work and support for brands across the country .
Speaker #5: And that's and that's exactly what we kicked off in the quarter . I've worked with this group in the past . I think what they do a really good job of is really digging into the , to the to the data in a way where we're getting into deep analysis around the , the , the , the members and the usage and the packages and the pricing structure .
Speaker #5: So it's a it's a very multifaceted approach . It's just not saying , you know , take our tears and increase them by a , a specific fixed amount .
Speaker #5: We're really getting into the science of this . We're also getting some great feedback from our franchisees . And , you know , taking their observations and their learnings at the local studio level .
Speaker #5: So I expect we'll come out with a really thoughtful approach to pricing and packages and intro promotions to maximizing the the use of our studios .
Speaker #5: And so, I'm excited about this work. I think it's definitely something that will help us in 2026.
Speaker #7: Okay , great . Thanks guys .
Speaker #3: Thank you . Our next question comes from the line of Randy Koenig with Jefferies . Please proceed with your question .
Speaker #8: Yeah . Thanks a . Mike . Can you expand upon I think you said some sort of comment about private equity entering more into the franchisee base .
Speaker #8: Can you just give us some perspective on , you know , what that would entail ? What brands what geographies , what are you trying to what are you kind of envision for that .
Speaker #8: And then I know there's you talked a little bit about in response to another question around this pricing kind of looking into it , but but what work is being done around density and thinking through what is the appropriate distance to have , you know , a club Pilates from another club , Pilates specific to a club Pilates , I should say , because it just seems like there's just a lot more ground that can be covered with more units per se .
Speaker #8: Maybe not just or instead of kind of tweaking some of the pricing , because it sounds like obviously these boxes are very productive .
Speaker #8: Maybe they are reaching maturity , but that would just argue for more units to be put in closer proximity to other units . So just give us your thoughts on how you're thinking about those two areas .
Speaker #8: The private equity and the density . Question . Thanks .
Speaker #5: Yeah , yeah . Thanks , Randy . You're hitting on the two topics that occupy the unit growth part of of our of our strategy and the team .
Speaker #5: As far as PE , I would say that specifically in club Pilates , we've had some really great experiences with larger scale operators .
Speaker #5: And I think in general , we are looking to grow with the operators we have and potentially look at opportunities to bring in larger scale operators to other geographies in in the US .
Speaker #5: And so private equity has done very well in this , in this space . And so we're having really good productive conversations with them .
Speaker #5: So I'm happy with what the team is doing on on that front . There may still also be opportunities with the other brands around larger scale operators .
Speaker #5: And we certainly are looking into that as well . On the real estate side , this is what I was specifically referencing when it comes to partnering with an experienced third party .
Speaker #5: Real estate partner and the use of pretty sophisticated location selection technologies so that we can feel good about being able to place studios in proximity to other studios , but still not having the negative impact of meaningful cannibalization .
Speaker #5: And so you're probably familiar . There are a lot of great systems out there . We feel like we've got we've got one that will work really well for us and be able to allow us to maximize our , our , our , our network of studios within specific geographies .
Speaker #8: Very helpful . And then last question , just give us your philosophy on portfolio construction . I think , look , people investors that I speak to generally welcome the paring back of the portfolio .
Speaker #8: Skinnying down the number of concepts and modalities that the the company has . Do you feel like this is the right set of concepts ?
Speaker #8: Do you think about potential more , more paradigms in the future ? Just just kind of give us your kind of sense on where we are with the portfolio and any changes that need to be made or not made .
Speaker #8: Thanks .
Speaker #5: Yeah , I won't speak to any future considerations . I'm obviously still learning about each of the brands I do agree that having a smaller portfolio like we have today and the divestitures that we've done have , have , have helped us and will help us , it'll allow us to be more focused as we ramp up a lot of this business capabilities that I was talking about .
Speaker #5: I also see a lot of complimentary aspects to the portfolio that we have . I see a lot of opportunities around leveraging best in class things that are happening in one brand and applying them to another brand .
Speaker #5: And I think pricing is a is a good example of that . So I'm happy with the portfolio we have . I think we've done some really good work around the divestiture side , and I'm excited to dive in with each of the brands to drive growth into 2026 .
Speaker #8: Super helpful. Thanks so much.
Speaker #3: Thank you . Our next question comes from the line of John Heinbockel with Guggenheim Partners . Please proceed with your question .
Speaker #9: So , Mike , when you when you guys talk with franchisees about the Pilates economic model , is the assumption still sort of the old ramp up , you know , as opposed to this ramp quickly to a to $1 million AUV because obviously , if that's true in theory , I guess you could go into you could pay more rent .
Speaker #9: You could absorb more cost , but there'd be no guarantee that you stay at a million AUV . So how is the sort of the model changed or it's not if this ramp holds , you know , it's upside to ROI .
Speaker #5: Well , I think that the the ramping that we've seen is , is a function of the brand and the strength of the brand .
Speaker #5: It's a function of having really , really strong franchisee pre-sale activity that we have developed and refined and improved over , over years .
Speaker #5: Right . And so as a scaled business , we're just we're getting a lot of things right on the execution around new studio builds .
Speaker #5: So I think that's I think that's great . And I think that it's all relative . Right . Based upon the studio where you open it .
Speaker #5: But I feel like we we can show improvement with each new class of studio openings from a modeling standpoint , the , you know , the work that the the real estate team is doing , especially around the new systems that we're putting in place .
Speaker #5: Our our adjusting accordingly and making changes to the ramp that help us make more intelligent decisions on site locations . So , you know , we'll continue to refine it and we'll continue to just , you know , get better and better .
Speaker #5: I still think there's opportunity around how we do our launch marketing . For example . So I , you know , I think but but it's a good it's a good problem to have right .
Speaker #5: When you when you have to modify your model for obviously a better startup .
Speaker #9: And maybe the follow up on the retail ops , you know , field consultants . So where are you with that ramp ? And then now that you've whittled down to five brands , obviously they can concentrate on fewer brands , fewer issues .
Speaker #9: But you know , where do you see . And I guess it wouldn't be Pilates . But where do you see the biggest opportunity to fix execution gaps ?
Speaker #9: Probably across brands .
Speaker #5: Yeah , the field team right now is about 20 . And we'll be growing a few more over the next couple months . They are going to be working directly with our franchisees and our studios around a system called Profit Keeper .
Speaker #5: And the focus of that is how to improve studio level economics . And I know , you know , when you start out with something , it always morphs into something that's a little different and a little better and a little evolved .
Speaker #5: So I anticipate this doing the same thing . I also think there's an opportunity , and I've seen this in other retail settings and studio settings and you've probably seen it too , where you can identify opportunity in this case , opportunity Studios .
Speaker #5: And you can focus their attention . Of course , supporting all of the brands and all of the units . But around a , a very defined group of studios that , you know , has the potential to perform better and , you know , create some some analysis , some feedback , even some friendly competition that makes a system like that work pretty well .
Speaker #9: Thank you .
Speaker #3: Thank you . Our next question comes from the line of Joe Altobello with Raymond James . Please proceed with your question
Speaker #10: Thanks .
Speaker #10: Hey guys . Good afternoon . I guess first question on Club Pilates . You know , what's what's the what's the purpose of the national ad campaign ?
Speaker #10: And I and I asked that because , you know , normally you're looking to build brand awareness , right ? But you've already got pretty high brand awareness .
Speaker #10: I would think . And you're already at record high utilization . So do you guys see more upside to that utilization rate
Speaker #10: ?
Speaker #5: So this was talked about when I first started . And I dug in with the team . And we've we've .
Speaker #5: modified the approach a little bit . And most of what will be hitting on the brand campaign will take place over Q4 . But the , the way I would think about it is it is us putting incremental dollars to certainly a creative part of it .
Speaker #5: But around new channels that we typically do not use in performance marketing . So we identified some of those channels . Some of them are traditional media , some of them are new media .
Speaker #5: CTV , YouTube , podcasts . And so what I really like about it and and I think this is going to help us as we get into 2026 , is we'll be able to understand the efficacy of each of these in these new channels .
Speaker #5: And then what it provides for us is new ways as we get into the year , if we want to put more dollars behind a particular brand , we know the channels that have the best chance to perform .
Speaker #5: And so I think that's what we're really getting as a huge benefit from this work .
Speaker #10: Okay , so just so just to clarify , so there are benefits to other brands . This is testing around marketing concepts behind Club Pilates .
Speaker #10: But it could have benefits for Stretch Lab etc. .
Speaker #5: Well , this particular campaign is solely for club Pilates . And but but I think what I was trying to communicate was it will be testing out channels and the efficiency and the effectiveness of new channels that we currently haven't done much work in .
Speaker #5: And that that learning will help us if we want to apply this investment or apply these channels to other brands . As we get into 2026 .
Speaker #10: Right . Okay . Got it . And just to follow up on that , John , earlier you mentioned , you know , 40% or so of your backlog is is still 12 months behind on a development schedule .
Speaker #10: How does the accounting work for that in the fourth quarter ? Because if I look at your EBITDA guide , obviously you're calling for a pretty , pretty sharp decline year over year in the fourth quarter .
Speaker #10: So how should we think about that accounting impact ?
Speaker #6: Yeah . So when you when you do a termination . Well first when you sell a license , the full balance of the license sale , the price goes onto the balance sheet as deferred revenue .
Speaker #6: And if you pay any commissions , the commissions get deferred as a cost as well . When you terminate the that does , is it immediately accelerates the full amount of the license that has been deferred .
Speaker #6: From a revenue perspective and commission to license , what the PNL . So in the in the third quarter , there was a large margin impact or margin benefit , I should say , related to the accelerated termination of licenses .
Speaker #6: As you move into the fourth quarter , the steep decline based off of the guide is really being contributed by a couple of factors .
Speaker #6: One , is there will not be a repeat level of terminations in the fourth quarter that there was in the third quarter , and that will be that's around about a $4 million .
Speaker #6: I guess you can call it headwind into the fourth quarter . In addition to the to that , as a reminder , we have about the to $4 million expense impact in the fourth quarter related to our franchise conference .
Speaker #6: As as spend that we do to to hold that event . And then as Mike mentioned , the marketing fund dollars , which is about $5 million for the club brand awareness that is also a headwind into the fourth quarter .
Speaker #6: So the the convention and the marketing fund , you can probably consider one time , you know , within the sequential quarters , the so and that's about an $8 million number .
Speaker #6: So as you kind of think of a a 33 number , $33 million adjusted EBITDA number in the third quarter , and you can kind of get to where the guide is by adding an additional 8 million of , you know , convention costs and marketing fund spend in the fourth quarter .
Speaker #10: Got it . Okay .
Speaker #11: There will be there will there will be heightened .
Speaker #6: Elevations again or terminations again in in the fourth quarter , but not to the magnitude that we saw in Q3 .
Speaker #10: Okay . Thank you .
Speaker #3: Thank you . Our next question comes from the line of Jonathan Camp with Baird . Please proceed with your question .
Speaker #12: Yeah . Hi . Thank you . John , if I could just follow up on the last point , I think I heard it .
Speaker #12: What was it , 4 million of benefit from terminations in Q3 . And then if 40% are still non current , I that seems like a pretty high number .
Speaker #12: Maybe like 900 or so . Could you share any insight on sort of the outlook for those . Can you get any of those back to current and any , any view of why the 40% hasn't come down ?
Speaker #12: I think that's been a consistent number as you have been terminating some .
Speaker #6: Yeah . Thanks , John , for that . Yeah . I mean , when you when you look at the delinquency of the backlog , one of the things that occurred during Covid , it was pretty much everything went delinquent .
Speaker #6: Right ? Because there was any licenses that was sold prior to Covid . There was about a two year period where , you know , franchisees were kind of waiting on the sidelines with signing new leases and , and such because of the fact that , you know , there was a shutdown of studios .
Speaker #6: So there was a natural kind of delinquency in our backlog earlier this year . We stopped terminating licenses while our new CEO came in and did a full assessment of franchisees by brand , where they stand , you know , and the terminations we have done are an output of that work where we have gone through with franchisees and identified which ones are not moving forward and made those terminations .
Speaker #6: So when you when you compare the sold but not open backlog from Q2 to the ending Q3 , we have significantly reduced the number of licenses that were delinquent .
Speaker #6: But the percentage that is still delinquent within the brands we still own is still around 40% . When you think about the brands where or the composition of the delinquent , let's call it , or the total remaining backlog is about 1800 , about 44% of that backlog is club .
Speaker #6: So we feel very strongly that those franchisees are going to move forward . The other 20% is in stretch lab yoga six is about 12 .
Speaker #6: Pure bar is about five . And then , you know , your BFT is about 20% . So , you know , we we we have seen a lot of growth in club Pilates .
Speaker #6: We do believe those those those units will be online . They're just delinquent from the development schedule when they originally bought the license , you know , the Stretch Lab is a function of AUV performance as well .
Speaker #6: So as we can continue to get the AUV up and stretch , lab , we should start seeing those franchisees move forward . One thing you have to remember too , John , is we did pro forma the licenses .
Speaker #6: So it is comparable with the brands that we own to the prior year . But or the prior period . So I do believe that the backlog , in addition , when we look at it at Q4 , that the backlog , you'll see that there will be some more licenses terminated and that percentage over time will start to come down through terminations , but also with franchisees moving forward , long answer .
Speaker #6: But by by kind of just organic default around Covid . You know , the backlog naturally just kind of got put into a delinquent state .
Speaker #6: But it doesn't mean that the licenses won't get open at some point . It's just that they're moving forward at on a delinquent schedule .
Speaker #12: Okay . Thank you for that . And then maybe to follow up , John , for the for the fourth quarter , any any help you can give in terms of just bridging , you know , comps , system sales and revenue that that you're , you're expecting , you know , there's still a fairly wide range on those .
Speaker #12: And then and then just Mike bigger picture . Could you maybe talk about some of the key metrics that you're targeting to to watch the progress initially here .
Speaker #12: And you know , any any further detail on when you would expect to start to see some progress around around the key initiatives you're watching ?
Speaker #12: Thank you .
Speaker #6: Yeah . As far as as far as system wide sales is concerned , I mean , we still guided to the 1.73 to 1.75 billion for system wide sales .
Speaker #6: So you could you know , you could assume that the , the system wide sales sequentially will be up from Q3 , one of the benefits with system wide sales in the fourth quarter is we do run promotional Black Friday .
Speaker #6: Marketing programs to drive , you know , package sales to drive new memberships in the fourth quarter . So you will sequentially see system wide sales up as far as comp is concerned .
Speaker #6: You know , with Q3 being , you know , a 1% comp , you know , we are expecting to see , you know , zero to low single digit from a comp perspective , it all depends on the successfulness of the the marketing programs in the fourth quarter and how they play themselves out .
Speaker #6: As far as revenue is concerned from Q3 to Q4 , there's a couple things at play . One is you will sequentially see overall revenue down from Q3 to Q4 .
Speaker #6: And the reason why , again , is the fact that you won't have the benefit of the heightened terminations in the third quarter or fourth quarter that you had in the third quarter .
Speaker #6: That's going to be , you know , the main driving force for overall revenue being down . You know , we do expect to see royalty production up in the fourth quarter , but it's just the one time terminations that are going to drive down revenue in Q4 from Q3 .
Speaker #6: But year over year , we do expect revenue to be up . You know , we did about 44.5 million , excuse me , 80 million in Q3 of 24 .
Speaker #6: You know , we're a relatively in line with that for , you know , Q4 of this year .
Speaker #5: Yeah . And on the KPI question , the good news about business like this is it's got some pretty straightforward KPIs . So weekly we're looking at leads new members , classes , retail sales , cancellations , average studio sales on a year over year basis .
Speaker #5: Each week . And we look at it compared to the previous four weeks and eight weeks . So we're we're getting a sense for momentum and where we stand .
Speaker #5: So we're in a pretty good rhythm when it comes to measuring the business and and addressing it .
Speaker #6: And John , let me correct what I said to the revenue in Q3 of 2024 was around 80 million , adjusted for the terminations .
Speaker #6: You know , you're probably going to be , excuse me , down sequentially from Q3 of 24 to Q3 of 20 , Q4 of 25 .
Speaker #12: Okay . Thanks again .
Speaker #3: Thank you . Our next question comes from the line of Ryan Myers with Lake Street Capital . Please proceed with your question .
Speaker #13: Yeah . Hi , guys . Thanks for taking my questions . First one for me , just kind of on the topic of innovation that you guys are looking to drive at some of the concepts , is this a concept wide nationwide thing ?
Speaker #13: Is it more so just specific franchisees that certain locations maybe need help driving member growth ? Just kind of walk us through , you know , some of the innovation there and how we should be thinking about that .
Speaker #5: Yeah . Ryan , good question . When it comes to class content , we approach it from a nationwide rollout standpoint . And again , we'll test and we'll perfect and we'll get it to the point where we're ready to launch it .
Speaker #5: But we will we'll launch it on a nationwide basis , understanding that some franchisees may not be able to implement it right at the time that we launch it .
Speaker #5: The other thing that will increasingly do is have that innovation work , feed our marketing , and , you know , driving awareness around new class content is a great way to do it .
Speaker #5: And so , you know , this is something that I think all the brands will benefit from . And we'll put together a schedule for each of them to to dive into it next year .
Speaker #13: Okay . Got it . And then just on the topic of pricing , I mean , how should we think about what the membership churn currently is and maybe more specifically at Club Pilates where you guys are looking to drive price and then maybe just kind of the concept as a whole , just so we can think about sort of the membership base that potentially is churning out there .
Speaker #13: Is it is it elevated or what's kind of at historical level there ?
Speaker #6: Hey , Ryan , I'll take that one . As far as club is concerned , we haven't seen a shift in cancellations or churn within the brand .
Speaker #6: That's it's a trend that's remained fairly stable . I think what you're starting to see is just the the actual total member per studio .
Speaker #6: It is up when you look at it compared to prior , you know , prior the same quarter prior year , but it's just kind of getting to that capacity where , you know , we're not adding at the same rate that we did historically .
Speaker #6: So churn overall has remained stable even when you look at memberships where , you know , they've been temporarily frozen , haven't seen any real shift in that either .
Speaker #6: So it's more of a top of the funnel kind of just I guess , signal that that that is the rate of growth has kind of slowed down a little bit .
Speaker #6: But overall , members per studio has remained fairly constant .
Speaker #13: Okay . That's helpful . Thanks for taking my questions .
Speaker #5: Thanks , Ryan .
Speaker #3: Thank you . Our next question comes from the line of Richard Magnus with B Riley Securities . Please proceed with your question .
Speaker #14: Hello . Thank you for taking my call . This is regarding Stretch Labs . Can you provide maybe more details on on your efforts to replace the loss of Medicare visitors ?
Speaker #14: The money that they brought in . What has worked so far to replace that lost revenue , and then you earlier call earlier in the year , you mentioned looking at ways to reduce the ratio of stretch instructors to visitors , because it tends to be very heavy in that particular metric .
Speaker #14: But what you've done there and what success you've had , and then finally , have you looked at maybe other ways of including that modality with other modalities to maybe reduce overhead or get more people interested in it ?
Speaker #5: Yeah . Richard . Good , good question . Yes , you're right . We touched on the Medicare Advantage issue . I would just say that we we have to drive an expanded membership mix .
Speaker #5: So as we looked at the current membership base , I think there's a lot of opportunity to drive younger member across more athletic pursuits , knew partnerships .
Speaker #5: All these are areas where the offering as it stands today should really resonate . Also , there's a chance to or there's an opportunity to drive business from folks who just want to purchase individual stretches , but not a full membership .
Speaker #5: And and I think there's an opportunity there . And then also from a just overall supporting the brand better , we're looking at pricing , intro packages , performance marketing , the online journey , which I think needs some work and local activation .
Speaker #5: So there there are a lot of things we're doing around membership expansion in in that concept from an operations standpoint , we're also testing a few operational adjustments that will lighten the demand on the labor side within the box .
Speaker #5: So not in a position to give any specific results of that work . But we are we are diving in for sure .
Speaker #14: All right . Sounds good . Thank you .
Speaker #3: Thank you . Our next question comes from the line of Owen record with Northland Capital Markets . Please proceed with your question .
Speaker #15: Hey guys . Thanks for taking my question here quickly . What are you hearing from franchisees about potential pressures in areas like labor , occupancy or instructor availability ?
Speaker #15: And if you are hearing anything from them , how are you helping them mitigate these challenges ?
Speaker #5: I don't I don't think we're hearing a lot more necessarily . I think that it's a it's a constant challenge just to doing doing business .
Speaker #5: And most of our franchisees , I think , do a really great job of addressing it . And balancing it . The availability of instructors is something that I think we have .
Speaker #5: We've heard on an ongoing basis , and one of the things that I think we do really well , especially within the club , Pilates system , is we've got a pretty extensive instructor training program that helps to obviously feed our feed .
Speaker #5: Our studios , which is great , and we're looking for ways to potentially expand that in the future , which is which is really good .
Speaker #5: I also think that having the field people engage with the studios around this prophet Keeper system , I think can help , especially on the cost side and the profitability side .
Speaker #5: So so I mean , I think we'll be helping them to address it , but you know , nothing , nothing of note .
Speaker #5: That's been raised more so recently .
Speaker #15: Great . Thank you .
Speaker #3: Thank you . And we have reached the end of the question and answer session . I would like to turn the floor back over to Michael Nuzzo for closing remarks .
Speaker #5: Well , thanks , everybody , for joining today's call . We look forward to connecting with many of our franchisees . We have our annual convention in Las Vegas in the next couple of weeks , and we look for more opportunities to to give you insight on the business .
Speaker #5: Thanks a lot
Speaker #5: .
Speaker #3: concludes today's conference . And you may disconnect your lines at this time . Thank you for your participation .